Money management strategies- what is better?

[david_wood]

Hi,

I am trying to define which of the following two major strategies is better:

1. Using a system with medium winning rate (lets say for the example, something around 40%), with a high TP/SL rate (for the example, 3:1).
2. Using a system with high winning rate (lets say over 90%) with low TP/SL rate (lets say 1:8).

The first is the traditional way of manual traders, and the second is familiar with robots.
I would like to hear some opinions about it, which is better and why?

[DRA]

Hi,

I am trying to define which of the following two major strategies is better:

1. Using a system with medium winning rate (lets say for the example, something around 40%), with a high TP/SL rate (for the example, 3:1).
2. Using a system with high winning rate (lets say over 90%) with low TP/SL rate (lets say 1:8).

The first is the traditional way of manual traders, and the second is familiar with robots.
I would like to hear some opinions about it, which is better and why?

My choice would have to be number 1 seen that its manual also if you check the two with a similar number of trades you will see that it produce a better return even using 1:2 R/R.

[david_wood]

My choice would have to be number 1 seen that its manual also if you check the two with a similar number of trades you will see that it produce a better return even using 1:2 R/R.

Yes, 1:2 is the classic proportion. The question is whether there is a way to use the second system in manual trading, or combine them.

The first is manual trader traditional choice, based on many traders’ experience, but the fact is that there are robots (not many, but still) that manage to generate quite decent profits using the second system.
How comes? what is the thing that enables this? And why can’t a manual trader do the same?

I think it may help overcoming some of my strategic problems, and I would be more than happy if someone has an idea.

[Spark]

Hi,

I am trying to define which of the following two major strategies is better:

1. Using a system with medium winning rate (lets say for the example, something around 40%), with a high TP/SL rate (for the example, 3:1).
2. Using a system with high winning rate (lets say over 90%) with low TP/SL rate (lets say 1:8).

The first is the traditional way of manual traders, and the second is familiar with robots.
I would like to hear some opinions about it, which is better and why?

hi David,

The second method (high winning rate) is mainly for scalpers, because it looks for small profit targets, which tend to be reached more easily than faraway targets. However not everyone enjoys scalping (I realized early on that I don’t
So, it depends on your preferred trading style.

[Shr1k]

You can put your numbers in this [B]SIMULATOR[/B] to see what kind of results you can expect from different types of plans.
hquotes.com/tradehard/simulator"dot"html(cant link yet)
Realize that in reality win/loss and win probability are related and if you try to raise one you will most likely drop the other. A good plan is a balance and can be consistently repeated. If you figure it out do please let us know.

[david_wood]

hi David,

The second method (high winning rate) is mainly for scalpers, because it looks for small profit targets, which tend to be reached more easily than faraway targets. However not everyone enjoys scalping (I realized early on that I don’t
So, it depends on your preferred trading style.

I guess that means I may use this system when the market is “resting”. That’s a good idea, I think. Thanks!

Realize that in reality win/loss and win probability are related and if you try to raise one you will most likely drop the other. A good plan is a balance and can be consistently repeated. If you figure it out do please let us know.

Yes, I know there is a trade-off between the two. My question is [B]what[/B] is the rhight balance for me. Thanks for the link!

[phil838]

Hi,

I am trying to define which of the following two major strategies is better:

1. Using a system with medium winning rate (lets say for the example, something around 40%), with a high TP/SL rate (for the example, 3:1).
2. Using a system with high winning rate (lets say over 90%) with low TP/SL rate (lets say 1:8).

The first is the traditional way of manual traders, and the second is familiar with robots.
I would like to hear some opinions about it, which is better and why?

Neither one of these [B]trading strategies[/B] is better than the other, they are just different ways to trade. I do think it’s important to point out that neither of your options is a money management strategy though!

Your money management plan is what manages your risk and keeps you from going broke. Win rates and R:R ratios have no part in that!

[dale_evans]

Neither one of these [B]trading strategies[/B] is better than the other, they are just different ways to trade. I do think it’s important to point out that neither of your options is a money management strategy though!

Your money management plan is what manages your risk and keeps you from going broke. Win rates and R:R ratios have no part in that!

i think it does have a part: if you creat a system with known win rate and r/r, you can calculate weather you are going to get broke, and how fast. that is, as i see it, money managment. it is just like to come to this from a different direction.

[DRA]

Neither one of these [B]trading strategies[/B] is better than the other, they are just different ways to trade. I do think it’s important to point out that neither of your options is a money management strategy though!

Your money management plan is what manages your risk and keeps you from going broke. Win rates and [B]R:R ratios have no part in that![/B]

I disagree. R/R ratio is definitely apart of money management, i’m referring to risk in dollars not pips.

[phil838]

I disagree. R/R ratio is definitely apart of money management, i’m referring to risk in dollars not pips.

Money management is your plan for managing your risk and insuring you don’t lose your money. R:R ratios have no place in risk management, they are for profit management. Stoplosses and lot sizes determine risk, not win rates or R:R ratios.

Just ask yourself this question… Does having a certain win rate and a certain R:R ratio stop you from losing all of your money? If not it’s not a money management plan.

Not having a crystal clear understanding of money management is the biggest cause of failure when you are trading forex.

I see peple on this forum all the time that think they are trading safely because they have a high win rate, or because their winners are 3 times larger than their losers. You can have all these things and still have bad money management.

[DRA]

Money management is your plan for managing your risk and insuring you don’t lose your money. R:R ratios have no place in risk management, they are for profit management. Stoplosses and lot sizes determine risk, not win rates or R:R ratios.

Just ask yourself this question… Does having a certain win rate and a certain R:R ratio stop you from losing all of your money? If not it’s not a money management plan.

Not having a crystal clear understanding of money management is the biggest cause of failure when you are trading forex.

I see peple on this forum all the time that think they are trading safely because they have a high win rate, or because their winners are 3 times larger than their losers. You can have all these things and still have bad money management.

I agree with you on win rate but not R/R, or simply risk for that matter.
Are you saying your risk per trade has nothing to do with MM?

[phil838]

I agree with you on win rate but not R/R, or simply risk for that matter.
Are you saying your risk per trade has nothing to do with MM?

No, I’m saying that risk per trade has nothing to do with R:R ratio.

Assuming you risk the same amount on each trade you will lose just as much on a failed 1:2 trade as you do on a failed 1:10 trade. You can change the R:R ratio all you want but that does not change your risk, and managing your risk is the definition of money management.

[DRA]

No, I’m saying that risk per trade has nothing to do with R:R ratio.

Assuming you risk the same amount on each trade you will lose just as much on a failed 1:2 trade as you do on a failed 1:10 trade. You can change the R:R ratio all you want but that does not change your risk, and managing your risk is the definition of money management.

Ok I guess we are on the same page.

[fxster]

Hi,

I am trying to define which of the following two major strategies is better:

1. Using a system with medium winning rate (lets say for the example, something around 40%), with a high TP/SL rate (for the example, 3:1).
2. Using a system with high winning rate (lets say over 90%) with low TP/SL rate (lets say 1:8).

The first is the traditional way of manual traders, and the second is familiar with robots.
I would like to hear some opinions about it, which is better and why?

My simple minded calculation will opt for no. 1.

40% x 3 : 60% x 1 = 120%:60% = 2:1

90% x 1 : 10% x 8 = 90%:80% = 1.12:1

That is assuming all the factors are reliable, i.e. exactly 40%, 60%, 3:1, etc etc

[Shr1k]

A # 2 system is very sensitive to things like slippage and spread. If you mess up 1 trade on the loosing side of your equation it can be nearly impossible to recover. The closer R:R is to 1:1 the more robust system you have. I am not saying 1:1 is the best just know that things happen. You might be having a bad day or your brokers price feed could go screwy for 30 seconds price could gap . If any of that stuff happens when you have a trade going then suddenly 1:8 is now 1:20 and lots of work goes away real fast.

That stuff happens count on it, make sure you can weather a few wild card trades if you want a long term system. I think thats why robots usually fail in the long term.

[david_wood]

Money management is your plan for managing your risk and insuring you don’t lose your money. R:R ratios have no place in risk management, they are for profit management. Stoplosses and lot sizes determine risk, not win rates or R:R ratios.

I think profit management is a part of MM. There are various tools to manage your money, and R/R and win rates are there as well as lot size and S/L.

Just ask yourself this question… Does having a certain win rate and a certain R:R ratio stop you from losing all of your money? If not it’s not a money management plan.

If you go into a trade only when the S/L it requires is affordable, then the answer is yes. I didn’t say that the 2 parameters I gave are the only that matter, I just focused on them.

Not having a crystal clear understanding of money management is the biggest cause of failure when you are trading forex.

I agree, and that is why I started this thread.

I see peple on this forum all the time that think they are trading safely because they have a high win rate, or because their winners are 3 times larger than their losers. You can have all these things and still have bad money management.

That is why I tie them together, I understand that only one of these is not enough.
And again, my aim was to focus on these specific ones, and I think I get a lot of valuable comments. Thanks.

[david_wood]

My simple minded calculation will opt for no. 1.

40% x 3 : 60% x 1 = 120%:60% = 2:1

90% x 1 : 10% x 8 = 90%:80% = 1.12:1

That is assuming all the factors are reliable, i.e. exactly 40%, 60%, 3:1, etc etc

Yes, I guess that is a reason why only a robot that work 24 hours and therefore take much more trades can make a decent profit with 2cond system… good point.

[david_wood]

A quick personal addition - I’m not comfortable with any system that has less than TP/SL of 1:2, or as it’s usually put, SL/TP 1:0.5, which means gaining half of what you risked.

Manually trading a system where a losing streak of 5 wipes out a month-or-more’s hard work is very hard to swallow and it is often the case that despite the reduced win-ratio of a 1:1 TP/SL it will actually provide a slightly better :R than the 1:0.5 system.

For example:

85% winrate, 1:0.5 SL/TP gives a :R of 27.5
65% winrate, 1:1 SL/TP gives a :R of 30

(:R is the return over 100 trades expressed as a multiple of Risk)

To compare this with your system 1 and 2 above:

40% winrate, 1:3 SL/TP gives a :R of 60
90% winrate, 1:0.125 SL/TP gives :R 1.25

A more realistic expectation, when looking at a 1:3 SL/TP is to assume a third will win:

33% winrate, 1:3 SL/TP gives a :R of 33 - nearly on a par with the 85% and 65% winrates above.

However these figures on their own still don’t define the profitability of a system over a specific time period - say a month. To achieve that you would have to take the number of trades in a month, divide the :R by 100 and multiply by the number of trades.
So your 90% winrate, 1:0.125 SL/TP might have a low :R but it if takes 30 times as many trades in a month as another system it may, overall, be more profitable (I still wouldn’t trade it though!)

I hope all that made some sense!!

Yes, it does. Thanks for the math, this is exactly what I needed.
But I still think if I have a few different systems, and I know when does each of them work best, I can wrap them all in one strategy.
I guess this thread helps me in that.

[david_wood]

A # 2 system is very sensitive to things like slippage and spread. If you mess up 1 trade on the loosing side of your equation it can be nearly impossible to recover. The closer R:R is to 1:1 the more robust system you have. I am not saying 1:1 is the best just know that things happen. You might be having a bad day or your brokers price feed could go screwy for 30 seconds price could gap . If any of that stuff happens when you have a trade going then suddenly 1:8 is now 1:20 and lots of work goes away real fast.

That stuff happens count on it, make sure you can weather a few wild card trades if you want a long term system. I think thats why robots usually fail in the long term.

I agree. That’s why I will probably use it only in horizontal movements, when the market is in rest.

[phil838]

That is why I tie them together, I understand that only one of these is not enough.
And again, my aim was to focus on these specific ones, and I think I get a lot of valuable comments. Thanks.

I agree you’re getting a lot of valuable comments, I just wanted to make sure new traders aren’t confused about what money management is.

If it doesn’t protect you from things like overleveraging, excessive drawdowns, and margin calls then, in my opinion, it’s not money management. But we’re each entitled to our own definitions and opinions. We’ll just have to agree to disagree on this one.